This is an extended version of the profile that appeared in the May issue of Investment Advisor, part of AdvisorOne's Special Report profiling this year's members of the IA 25, the most influential people in and around the advisor universe. See the complete list and Special Report schedule for extended profiles of all the 2011 members of the IA 25.
We’ve heard many different definitions for behavioral finance, but none so succinct.
“Behavioral finance is finance with normal people in it,” Meir Statman says matter-of-factly. “Sometimes we are normal-smart and sometimes we are normal-stupid.”
Statman is the Glenn Klimek Professor of Finance at the Leavey School of Business, Santa Clara University and Visiting Professor at Tilburg University in the Netherlands. His research focuses on behavioral finance (obviously), and he attempts to understand how investors and managers make financial decisions and how these decisions are reflected in financial markets.
“What differentiates me from some of my colleagues in behavioral finance (and much of the application of behavioral finance among advisors) are their focuses on errors with little consideration of wants,” he says. “What we all need to realize is that these decisions are made on the way to getting what they want. We have to understand that this is the engine that drives the train, and the train’s cars are the biases and baggage they bring.”
For example, a common advisor complaint, he says, is that investors trade too much. But what if this is done because they simply enjoy the act of trading, like a skier enjoys skiing and akin to the same sort of thrill?
“Once we figure out what people want and why they want it, it gives advisors a powerful tool over and above a lecture about what advisors might feel is destructive behavior,” he says.